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How Congress is hurting jobs

Lawmakers are expected to take their time deciding how to replace the sequester of automatic cuts scheduled for next year. Experts say prolonging the uncertainty will hurt hiring this fall.

NEW YORK (CNNMoney) -- Everyone in Congress says they want to help create jobs and economic growth.

But federal agencies and government contractors in the private sector, which actually hire people, may find that ironic. They are still in the dark about future funding levels because lawmakers have not said whether they will replace heavy-handed automatic spending cuts set to take effect next year.

The so-called sequester -- which no one in Congress likes but can't agree on how to replace -- would total about $110 billion next year alone. Half the cuts would come from defense and the other half from nondefense spending on domestic programs.

Most don't expect lawmakers will reach a decision until the lame-duck session of Congress after Election Day, and possibly not until early 2013.

The problem is that prolonging the uncertainty is likely to cause serious hiring slowdowns and possible layoffs, experts and businesses said.

"If the deleterious consequences ... are to be averted it must be done before the lame duck. Indeed, since most elected officials will spend most of the fall campaigning, the [cuts] must be dealt with by September," according to a recent report from the Bipartisan Policy Center.

Businesses and agencies need to plan for the year ahead, and they simply can't because they don't know how many contracts will be funded and how many programs they'll need to cut back on.

The point is not lost on Democrat Carl Levin, who chairs the Senate Armed Services Committee.

"[T]hat uncertainty which is created by ... the specter of sequestration ... is a real threat to this economy. So not only must we avoid sequestration ... we must do it in time to avoid a severe weakening to this economy," he said at a National Press luncheon.

Those in the defense industry say the sequester is already having a chilling effect.

"In the past we'd add head count [in summer] to prepare for new work. This year, we'll clearly take a more conservative approach until we see what's going to shake out," said Samuel Strickland, CFO of defense contractor Booz Allen Hamilton (BAH, Fortune 500) during a recent investor call.

At Lockheed Martin (LMT, Fortune 500), the largest U.S. defense contractor, the story is similar. "We are already taking action by not hiring and training new workers, not investing in new plants and equipment and not investing in new R&D," said company chairman and CEO Robert Stevens during a Senate caucus lunch in March.

But Stevens also warned that if he doesn't get clarity soon, he may be forced to issue notice this fall of possible layoffs in 2013. The federal WARN Act requires businesses with more than 100 employees to notify workers at least 60 days in advance of a mass layoff or plant closing.

Since the sequester takes effect Jan. 2, 2013, the WARN Act requirement could mean layoff notices come out a few days before the Nov. 6 election.

But layoff notices are likely to be a measure of last resort for both federal agencies and private sector contractors, said government contracts expert Dan Gordon, who used to run the White House Office of Procurement.

Instead, he said he is expecting "a dramatic slowdown in hiring" this fall.

"It's very slow and expensive to cut back on the government's commitment under an existing contract. For both [federal agencies and private contractors] it's always easier to stop hiring than to lay off existing employees," Gordon noted.

He also expects federal agencies over the next seven months to be very reluctant to enter into new commitments with contractors, even though government has become more heavily reliant on contractors to do everything from guarding office buildings to running IT departments.

"Why make a commitment that might end up being costly to you?" said Joseph Minarik, senior vice president of the Committee for Economic Development.

Like Gordon, he believes hiring freezes are the greatest risk on the jobs front this fall.

But more than anything, Minarik said, for everyone in the public and the private sector "all the time being spent on planning for this situation is pure economic waste."